The New York Stock Exchange (NYSE) front facade is visible in New York, United States, on February 16, 2021. REUTERS/File Photo/Brendan McDermid (Reuters) – LONDON, July 7 (Reuters) – If the rapid recovery in the world’s largest bond markets in the last 24 hours is any indication, an economy recovering from the COVID-19 shock and surging inflation is yesterday’s story. The price of US 10-year Treasuries has risen, causing yields to fall 8 basis points on Tuesday, the second largest daily decline in 2021. On Wednesday, the rally escalated, with rates falling to just under 1.3 percent, their lowest level in almost four months. British gilt yields have dropped to a similar low, while German Bund yields have plunged to -0.3 percent, after appearing to be on the verge of breaking through 0% in May. Several factors have been proposed, including a squeeze on investors who had gambled on rising yields, softer-than-expected economic statistics, and concerns about COVID variations. When you get past the noise, the true message from sovereign bond markets, which are carefully studied by policymakers and investors as a crucial indication of economic trends, is clear: economic growth, albeit firmer, appears to have peaked, and any increase in inflation will most likely be temporary. “Markets have shifted from believing that growth is strong and inflation is possible to believing that growth has peaked and inflation is fleeting,” said Guy Miller, chief market strategist at Zurich Insurance Group. The bond market’s turnaround may contradict the message from the US Federal Reserve, which has recently turned to a hawkish stance and accelerated its rate hiking schedule. Despite this trend, the Fed does not anticipate to begin raising rates until 2023, and, like other major central banks, has stated that it will ignore any short-term rise in inflationary pressures. “You have to adjust your thinking given the realities,” Pictet Wealth Management strategist Frederik Ducrozet said. “Economic growth is not steady, inflation is not about to skyrocket.” The return to bonds comes as evidence supports the notion that economic growth has reached a nadir. On Tuesday, data revealed that service sector activity in the United States expanded at a moderate pace in June, while a carefully monitored barometer of German investor mood declined more than predicted in July. find out more Many traders holding “short” Treasury positions – effectively bets that yields would climb in tandem with a rebounding economy – would have lost money as a result of the bond rally, prompting many to liquidate their positions, pushing yields even lower. find out more THE REAL DEAL Many investors have been pessimistic on Treasuries, including the world’s largest asset management, BlackRock. On Wednesday, BlackRock restated its pessimistic position. Yields, on the other hand, have been steadily declining by 50 basis points since March. Some mention demand from Europe and Japan, where central banks are staunchly dovish, as an explanation for the slide. Others point to the influx of liquidity into the US financial system as the Treasury spends its cash balance and the Federal Reserve buys $120 billion in Treasuries each month. However, despite the apparent strength of the economy, bond markets may have had reservations about the forecast; yield drops are being led by “real” or inflation-adjusted borrowing rates, according to ING Bank analysts. Ten-year real yields in the United States have fallen to minus 1%, the lowest level since February, while German real yields have fallen to three-month lows. According to Mike Sewell, a portfolio manager at T.Rowe Price, the 1.77 percent U.S. 10-year nominal yield reached in March may stay this year’s high as further “reflation” bets are forced to unwind. “There’s still a chance that trade will reengage, but it’s more likely in the third or fourth quarter. The reflation trade is currently not dead, but it is in hibernation “According to Sewell. There are two more causes that could be causing your anxiety. First, China, the world’s second largest economy, revealed statistics this week suggesting that growth in the services sector has slowed to a 14-month low. Some observers feel that this is a pattern for how industrialized economies will fare in the future. Second, COVID-19 caseloads are increasing in many countries, notably China, and concerns are mounting about new, potentially more contagious variations. The Delta variation of the coronavirus, which is currently prevalent in many nations, including the United States, is easier to spread than earlier variants of the virus. “Markets’ muscle memory is that if instances rise, governments will clamp down again, resulting in slower development and a vicious cycle,” said Charles Diebel, head of fixed income at Mediolanum International Funds. Dhara Ranasinghe contributed reporting, with additional reporting from Sujata Rao and Karin Strohecker in London and David Randall in New York; Sujata Rao and Nick Tattersall edited the piece. The Thomson Reuters Trust Principles are our standards./n
Read More
